Indian Tribunal holds Dutch entity not liable to withholding tax on tax-refund interest

September 13, 2022 2 minute read

The Indian Income Tax Appellate Tribunal (ITAT) holds that the Indian income-tax refund paid to the Netherlands-based company (a parent of the Philips Group) is not liable to withholding tax.

A taxsutra story

The Netherlands-based company (a parent of the Philips Group) is not liable to withholding tax by virtue of beneficial provision of article 11 of India-Italy bilateral tax treaty read into article 12 of the India-Netherlands bilateral tax treaty by resorting to the MFN clause under the Protocol thereof.

The ITAT observes that interest on Indian income-tax refund constitutes debt claim under the India-Italy bilateral tax treaty, as interpreted by the Indian State High Court (Madras High Court) in Ansaldo Energio and relies upon other State High Court (Delhi High Court) rulings in Steria India and Concentrix Services and the State High Court (Karnataka High Court) ruling in Apollo Tyres apart from the coordinate bench ruling in ITC to extend the benefit of the bilateral tax treaty with Italy, which was entered into after India entered into the bilateral tax treaty with the Netherlands. 

The ITAT observes, “the beneficial provisions available to the assessee under the India-Italy Treaty on the aspect of taxability of interest as in the present case will get force of attraction and becomes available into the India-Netherlands DTAA by virtue of MFN clause under the said Protocol. Thus, by harmonious reading of the two treaties it follows that the beneficial provision of the India-Italy DTAA will be imported into the reading of India-Netherlands DTAA resulting into accrual of benefit to the assessee.” The ITAT also reiterates the legal position that a Protocol to a bilateral tax treaty is its integral part and carries the same binding force as the MFN clause therein. The ITAT holds that bilateral tax treaties are the agreements between the two sovereigns based on negotiations which are for reciprocal and mutual benefits and by MFN clause in the Protocol to the India-Netherlands tax treaty, the India and the Netherlands have negotiated for a more restrictive scope of taxation on certain incomes including interest.

Therefore, the ITAT holds that interest on income tax refund would be a non-taxable sum by virtue of being a “debt claim” from the government of India.